Japan
28 May 2013
Shinzo Abe hopes his stimulus package will revive the Japanese economy, but will the lending industry benefit? SLT finds out
Image: Shutterstock
Aggressive stimulus measures in Japan have meant good things for the country. Its economy鈥攖he third largest in the world鈥攅xpanded at its quickest pace in a year, with GDP rising 0.9 percent in the three months to March compared to the previous quarter.
The government recently upgraded its assessment of the economy, and it looks as though the country is recovering after a recession that left exports and factory output at a miserable level.
The key driver for this change, say analysts, is Prime Minister Shinzo Abe鈥檚 aggressive policies, called 鈥楢benomics鈥�. Abe launched a 10.3 trillion yen ($110 billion) stimulus package in the beginning of 2013, one of Japan鈥檚 largest, and thought to be the beginning of the end of two decades of economic sluggishness.
The talk around growth does not seem to be mere chatter, though. Sony garnered its first annual profit in five years this month, and Toyota tripled its earnings. Sony has also proved a fruitful source of rumours concerning its entertainment division. Karl Loomes, a market analyst at SunGard Astec Analytics, says: 鈥淭here has been talk on and off this year that Sony鈥檚 entertainment arm would make a strong acquisition target if it were to be spun-off, but so far Sony have adamantly said this will not be the case.鈥�
Loomes adds that another big move recently came when Sumitomo Mitsui agreed to buy 40 percent of Indonesia鈥檚 Bank Tabungan Pensiunan Nasional, but states: 鈥淎s far as lending opportunities are concerned, so far we haven鈥檛 seen any significant changes to borrowing levels or costs coming on the back of this.鈥�
M&A activity aside, there are hints that the Japanese market has been considering the implications of the sector as a positive force for the country. Loomes states that a lot of focus in recent months has been looking towards some easing off on the rules concerning short selling.
鈥淚n March, the Japanese Financial Services Agency said that although they will be making the naked short selling ban permanent, and making some changes to the reporting and disclosure rules, they will also be removing the uptick rule (or at least only making it come into action after a 10 percent fall in price)鈥攁nd it is this point that many are looking to.鈥�
Loomes adds that numerous studies, including one of SunGard鈥檚, show that limiting short selling can actual hinder the markets. 鈥淟ooser rules would be expected to bring about increased liquidity in both the cash and securities lending market, as well as helping price transparency and often increasing demand to borrow securities. The one caveat with these changes however, is that they are due to come into play in November, and so the impact at this stage is anticipation rather than realised changes.鈥�
A demanding presence
Japanese government bonds have recently鈥攁nd surprisingly鈥攆allen in value, with the yield on the benchmark 10-year Japanese government bond (JGB) surging to 0.92 percent in May.
鈥淲e have been observing a steady increase in borrowing fixed income securities in the country from around the start of March鈥攎ost of which seems to be coming specifically from increased borrowing of government bonds,鈥� says Loomes.
鈥淎ssigning all of this increase to falling prices would be an overstatement, however bond lending and borrowing is often done with the actual cash value of the transactions in mind, and so lower prices would need to be matched by increased levels in terms of units.鈥�
In terms of markets, says Loomes, demand to borrow shares has seen little change from the norm, in that the wholesale market still by far sees the largest volumes compared to say retail or broker to broker. 鈥淥ne change that we have been observing in recent months, however, is in the reasons behind the demand to borrow shares in Japan.鈥�
鈥淪pecifically we have seen falling demand to borrow specials, while at the same time borrowing volumes of general collateral have actually increased. Even with the country鈥檚 short selling limitations, we would expect decreased borrowing of specials to represent a more optimistic view of the market (for example, with less short hedging against long position), while general collateral stock borrowing tends to be used for the more day to day activities such as trade settlement.鈥�
As for asset classes, fixed income has seen a general increase in borrowing since early March, much of which seems to be coming in government bonds, says Loomes.
鈥淪ome of the most interesting stories are actually for individual securities. Sharp Corp, for example, has been one key stocks that we have seen coming up time and again over the past six months, with seemingly non-stop news flow keeping interest high from borrowers and short sellers. Levels of borrowing have more than doubled over the last 12 months, while the cost of borrowing has climbed out of safe general collateral territory, moving deep into the specials range鈥攑eaking just last month at almost 17 percent per annum. Even now having pulled back somewhat, its cost of borrowing is one of the highest we see for Japanese equities.鈥�
The government recently upgraded its assessment of the economy, and it looks as though the country is recovering after a recession that left exports and factory output at a miserable level.
The key driver for this change, say analysts, is Prime Minister Shinzo Abe鈥檚 aggressive policies, called 鈥楢benomics鈥�. Abe launched a 10.3 trillion yen ($110 billion) stimulus package in the beginning of 2013, one of Japan鈥檚 largest, and thought to be the beginning of the end of two decades of economic sluggishness.
The talk around growth does not seem to be mere chatter, though. Sony garnered its first annual profit in five years this month, and Toyota tripled its earnings. Sony has also proved a fruitful source of rumours concerning its entertainment division. Karl Loomes, a market analyst at SunGard Astec Analytics, says: 鈥淭here has been talk on and off this year that Sony鈥檚 entertainment arm would make a strong acquisition target if it were to be spun-off, but so far Sony have adamantly said this will not be the case.鈥�
Loomes adds that another big move recently came when Sumitomo Mitsui agreed to buy 40 percent of Indonesia鈥檚 Bank Tabungan Pensiunan Nasional, but states: 鈥淎s far as lending opportunities are concerned, so far we haven鈥檛 seen any significant changes to borrowing levels or costs coming on the back of this.鈥�
M&A activity aside, there are hints that the Japanese market has been considering the implications of the sector as a positive force for the country. Loomes states that a lot of focus in recent months has been looking towards some easing off on the rules concerning short selling.
鈥淚n March, the Japanese Financial Services Agency said that although they will be making the naked short selling ban permanent, and making some changes to the reporting and disclosure rules, they will also be removing the uptick rule (or at least only making it come into action after a 10 percent fall in price)鈥攁nd it is this point that many are looking to.鈥�
Loomes adds that numerous studies, including one of SunGard鈥檚, show that limiting short selling can actual hinder the markets. 鈥淟ooser rules would be expected to bring about increased liquidity in both the cash and securities lending market, as well as helping price transparency and often increasing demand to borrow securities. The one caveat with these changes however, is that they are due to come into play in November, and so the impact at this stage is anticipation rather than realised changes.鈥�
A demanding presence
Japanese government bonds have recently鈥攁nd surprisingly鈥攆allen in value, with the yield on the benchmark 10-year Japanese government bond (JGB) surging to 0.92 percent in May.
鈥淲e have been observing a steady increase in borrowing fixed income securities in the country from around the start of March鈥攎ost of which seems to be coming specifically from increased borrowing of government bonds,鈥� says Loomes.
鈥淎ssigning all of this increase to falling prices would be an overstatement, however bond lending and borrowing is often done with the actual cash value of the transactions in mind, and so lower prices would need to be matched by increased levels in terms of units.鈥�
In terms of markets, says Loomes, demand to borrow shares has seen little change from the norm, in that the wholesale market still by far sees the largest volumes compared to say retail or broker to broker. 鈥淥ne change that we have been observing in recent months, however, is in the reasons behind the demand to borrow shares in Japan.鈥�
鈥淪pecifically we have seen falling demand to borrow specials, while at the same time borrowing volumes of general collateral have actually increased. Even with the country鈥檚 short selling limitations, we would expect decreased borrowing of specials to represent a more optimistic view of the market (for example, with less short hedging against long position), while general collateral stock borrowing tends to be used for the more day to day activities such as trade settlement.鈥�
As for asset classes, fixed income has seen a general increase in borrowing since early March, much of which seems to be coming in government bonds, says Loomes.
鈥淪ome of the most interesting stories are actually for individual securities. Sharp Corp, for example, has been one key stocks that we have seen coming up time and again over the past six months, with seemingly non-stop news flow keeping interest high from borrowers and short sellers. Levels of borrowing have more than doubled over the last 12 months, while the cost of borrowing has climbed out of safe general collateral territory, moving deep into the specials range鈥攑eaking just last month at almost 17 percent per annum. Even now having pulled back somewhat, its cost of borrowing is one of the highest we see for Japanese equities.鈥�
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